Central banks in Denmark, Sweden, Switzerland and Japan along with the ECB have adopted negative interest rates in a bid to further stimulate lending and boost economic growth. It is debatable as to how effective negative rates are in achieving these aims but central bankers have been credited with helping the world economy recover from the financial crisis and they continue to experiment with unconventional methods.
Negative rates are a drag on the retail banks’ profitability as excess reserves put on deposit with the ECB attract a negative rate of 0.4%. The central banks want retail banks to lend this money instead of putting it on deposit with them. Retail banks argue that there isn’t the demand.
The banks have, so far, resisted passing negative rates along to retail customers but there are signs that this could be changing: RBS recently sent letters to business customers highlighting a change to its terms & conditions and the possibility of negative deposit rates. A German co-op savings bank will pass on the 0.4% negative charge on deposits over €100,000 from September onwards. Bank of Ireland is to charge corporate and institutional customers on deposits of €10m or more while German insurer Munich Re is reported to have stored in excess of €10m in a vault as a way of avoiding negative rates.
One major problem the banks have with passing negative rates along to the general public is that they would likely see massive withdrawals as customers take their cash out of the banks rather than accept a negative rate. This is clearly easier for customers with smaller levels of savings than corporate customers with millions on deposit (where would Apple Inc. store its $200 billion cash pile?). This would create new problems for the banking system, not to mention the spike in crime that would accompany it.
One possible solution has been proposed: a cashless society. If cash was confined to the history books and all transactions involved a digital transfer through one method or another (plastic cards, phones, apps, etc) financial institutions could impose negative rates on customers and we wouldn’t have much choice but to accept it (barter could make a comeback). It is unlikely to happen in the near future but we are heading towards a cashless society and all the pros and cons that go with that.
Most of us do not have to worry about negative interest rates for the moment but, if you have large cash deposits, you should consider diversifying across other asset classes.
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